Double materiality

What it means

Double materiality is the basic principle of sustainability reporting under CSRD and the ESRS standards. A company assesses each topic from two angles: impact materiality, meaning the actual or potential effect of its activities on people and the environment, and financial materiality, meaning how the topic can affect its cash, value and risks.

A topic is material and reported if it is material from at least one angle. For example, a manufacturer’s carbon footprint may be material in terms of impact even if it costs the company nothing yet, and a shortage of skilled staff may be financially material even though the company harms no one.

The concept builds on accounting materiality, which says what matters to users of the financial statements. Double materiality adds the outside-in view, so the assessment covers the company’s whole value chain, suppliers and customers included.

How it works in practice

The assessment proceeds in steps: mapping activities and the value chain, listing possible topics, rating them by severity and likelihood, and finally setting the threshold above which a topic is reported. Stakeholders take part in the rating: employees, customers, banks or the local community.

The result decides which parts of ESRS the company reports and which it may omit. Because the auditor reviews the assessment, it must be documented: which topics were considered, who was consulted and why some topics stayed below the threshold.

Companies outside CSRD meet double materiality in simplified form, for example through the voluntary VSME standard or bank questionnaires. We then recommend at least a short assessment that can be linked to existing risk management.

What to watch out for

The most common mistake is focusing only on the financial side and leaving out impact, or conversely reporting everything related to ESG without an assessment. The first produces an incomplete report, the second one in which important information is lost among the immaterial.

The assessment is not a one-off. A change of activity, an acquisition or entry into a new market can change which topics are material, and an audit checks whether the company updated it. Last year’s assessment copied forward is a risk for assurance.